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Public should know HP secrets

The Hewlett-Packard obsession with secrecy prompted me to consider one of the worst abuses in corporate America that is picking up steam once again. It is the practice of management teams taking their public companies private.

When this happens, we stock and mutual fund investors are simply being ripped off by the managers and their co-conspirators, the financial community. There should be a law against it, and there is if you take literally the definition of fiduciary responsibility as it applies to corporate directors representing us.

However, like the speed limit and motorcycle muffler laws, the fiduciary obligations in these situations are routinely ignored.

Here's how the system works: The managers of a company determine that their company's stock is cheap in relationship to what they think is the true value of the firm. The stock has been beaten down in value because the company is presumably broken and needs to be fixed.

Managers propose that a private firm offer to buy out the public stockholders in what is called a "tender offer." This is always at a price higher than the current stock price or nobody would ever offer to sell. Existing stockholders make at least some profit over their current stock price, and many go away happy. Ignorance is bliss.

Now, the managers buying up all that public stock go to work to "fix" the company so it can be "flipped" back into the public market. As a group, a few key people now own perhaps 10 percent to 30 percent of the stock depending on what kind of a deal they were able to cut with their source of funds for the purchase.

A reasonable person, such as a director for example, might ask why this same team of managers that broke the company in the first place represents such an ideal candidate for "fixing" the problems and returning the firm to profitability. Some might also wonder whether the forward-thinking managers, trained in business school to always think ahead, might have had a reason to deliberately mismanage the company to create a cheaper stock price and a better deal for themselves.

When it comes right down to the price of the stock for the tender offer, however, this is always based on something called a "fairness ruling" issued by investment banking firms -- the same firms that expect to make a killing when they take the company public in the not-so-distant future.

A few years later, this former basket case of a company becomes a paragon of profitability, and is taken public in an IPO for what is routinely at least twice what the tender offer generated to the previous public stockholders. Directors sit by and watch all this happen as they collect a share of directors' fees in the form of company stock.

In theory, there was nothing magic about the company turnaround that depended on taking the company private. All that value could have been created for the original shareholders -- us.

Mutual funds have the power to remove directors who sit by and preside over this behavior. In the past, they have generally sided with management, but funds are now required to publicize how they vote when directors are put up for election. The funds investing our money fought this law tooth and nail but were crushed by the power of logic.

What is coming to light is the extent to which mutual funds vote for directors when the funds themselves are earning revenue providing investment management services or 401(k) administration to the companies. A simple law would end it. Like the old Glass Steagle Act that once separated banking and brokerage firms, we could make it illegal for a mutual fund investing in a company to also perform fee-for-service work for that company. This would prompt a more honest assessment of which directors deserved to remain and avoid today's conflict of interest.

As to the managers, their financial backers and the investment banking industry stealing value from stockholders, a simple law would stop it. We can demand "Flip Protection" with a sliding scale of future IPO profits inuring to a trust fund for stockholders of record as of the date of the original buyout.

This would make it less attractive for managers to loot the companies that employ them, and it would bring to bear the heavy artillery of the fund industry with its powerful voting ability -- a tool we have bequeathed to them with our flood of retirement dollars.

As for Hewlett-Packard, I think it's great that confidential information got to the press. That's our boardroom, including the chairs and paneling. Short of any marketing-related secrets or acquisition targets, we have a right to know everything.

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